How to Pick the Right Vacation Rental Investment — A Guide for Investors

In recent years, investing in vacation rentals has become one of the most popular strategies for real estate investors looking to boost their portfolios and increase their monthly cash flow.

At the same time, committing to a vacation rental investment has also become one of the best ways for first-time investors to kickstart their investment journey and make the most out of their vacation homes.

But how did this real estate investing strategy become so popular in the first place?

Vacation rentals, also known as short-term rentals, are fully serviced accommodations rented out to guests (usually tourists) in popular vacation destinations.

Following the rise of short-term rental booking websites like Airbnb and Vrbo, the vacation rental market is now valued at over $22 billion — yes, even after a worldwide pandemic!

Here’s all you need to know about investing in a vacation rental property in 2022, including how to spot a money making opportunity in your market and how to finance it.

Why invest in a vacation rental property?

Thanks to the renewed enthusiasm for domestic travel and the rise of work from home opportunities, the vacation rental industry is thriving now more than ever.

Short-term rental properties are in high demand among both tourists and professionals looking to find a home away from home, so investors are guaranteed to find guests all year round.

On top of that, vacation rental properties are a profitable business, with short-term investors yielding as much as 30% more than conventional landlords offering long-term leases.

It’s clear that, in many ways, investing in a vacation rental property is a sound decision for both seasoned and new investors alike.

Let’s take a closer look at the biggest pros and drawbacks of investing in vacation rentals.

Increased cash flow

The biggest advantage of this investment strategy comes down to the substantial income you can make from hosting.

On average, Airbnb hosts can earn over $900 per month by renting out their investment property, all while being able to claim generous tax benefits.

In many ways, investing in vacation rentals is a much more profitable option than being a long-term landlord, as you’ll be able to adjust listing prices according to seasonal demand and fluctuating market conditions. You also won’t have to deal with problematic tenants and all the legal hassles of late payments and evictions!

Great marketing strategies and a knack for targeting the right location and ideal guest will also help you avoid expensive vacancy periods, boosting your annual revenue even more.

Considerable tax write-offs

Short-term rental hosts can also benefit from considerable tax write-offs exclusive to the vacation rental industry, further boosting their income.

You’ll be able to claim depreciation as a tax deduction as long as you are actively renting it out to guests, even if it’s not occupied for a period of time.

On top of that, vacation rental owners can also claim cleaning costs, maintenance costs, and all marketing expenses as they’re filing their taxes, as well as costs related to home improvements such as new furniture and bigger projects like new fixture installations.

Just make sure to conduct a cost segregation study whenever you’re carrying out major land improvements and you may be able to deduct them from your tax returns!

Versatility

Finally, buying a vacation rental ensures you have an investment that will last and be worth it in the long run, thanks to the unparalleled versatility of vacation rental properties.

If you decide to give up on hosting or the strategy ends up not working out after a few years, you’ll be able to turn the short-term vacation property into a long-term, traditional rental property or even into your very own vacation home.

Of course, selling is also an option, and if you decide to work with a real estate agent that understands the short-term rental market, you might also be able to sell it to a short-term rental investor like yourself for an even bigger profit!

The cons of a vacation rental investment

While being a short-term rental host is, in many ways, a more hands-off job than being a full-time landlord, you should also keep in mind that short-term rentals are far from a get-it-and-forget-it deal.

Unless you decide to rely on a property management company to deal with cleaning, marketing, and repairs, you should be prepared to spend plenty of time dealing with time-consuming daily tasks.

But time commitments aside, there are a few more drawbacks to investing in short-term vacation rentals you should be aware of before you close the deal on your first rental…

Expensive vacancy periods

Both full-time landlords and vacation rental investors suffer from the same issue when it comes to maintaining a stable income: Finding tenants and guests all year round.

But while conventional landlords can rely on contracts and lease terms to prepare for vacancies, vacation home owners might find themselves guestless with little to no preparation.

With no one to pay for accommodation, extended vacancy periods can quickly become very expensive. And if you haven’t made sure to budget for it by saving a set percentage of your earnings each month, prolonged vacancy periods could very well break your business.

Luckily, there are many ways you can ease the pressure of vacancies.

Make sure you’re adjusting your listing price according to seasonal demand and aim to save up to 20% of your monthly income for a rainy day, or offer discounts for longer stays during slower periods.

You can ramp up your marketing efforts when you’re facing the low season or even convert your stay into a long-term rental for professionals if your bookings slow down too much.

By preparing for the worst and thinking on your feet, you can avoid expensive vacancy periods altogether!

Financing can be challenging

Having to pay more to finance your vacation rental investment is probably the biggest downside of running a vacation property.

If you decide to finance your investment with a traditional property loan, you’ll have to be prepared to shoulder higher interest rates than conventional mortgages, incurring higher monthly payments and interest until everything is paid off.

On top of that, conventional lenders will often require a larger down payment to offset the risk, with deposits averaging as much as 25% more than usual property down payments.

If you’re already an established investor with an extensive portfolio of properties, this likely won’t be much of a problem, as you can leverage your equity or network with other investors to strike a better deal.

Brand-new investors, on the other hand, might find themselves locked out of favourable financing altogether.

Luckily, there are many ways to obtain financing without signing up for a lifetime of high interest rates and repayments, even if you’re new to real estate investing.

If you don’t qualify for an advantageous conventional loan, you can try getting in touch with private lenders, refinancing your primary residence, or better yet, contacting a mortgage loan company that specializes in short-term rental loans.

If you choose to go for the latter option, you couldn’t have come to a better place — The Mortgage Shop is the East Coast’s leading lender for both long-term and short-term rentals!

Tough restrictions

If you’re planning to buy vacation rental property in the U.S. or any major European city, you should first know that not all cities will be as welcoming to investors.

Some cities around the country and a number of HOAs have several restrictions when it comes to operating short-term rentals, with a small number of top tourist destinations even banning Airbnb listings altogether.

For example, major hotspots like San Francisco only allow hosting if you’re a full-time resident, while in Santa Monica, investors can only list their property if they live in the home themselves.

To avoid strict regulations, make sure you’re doing your research beforehand and only investing in vacation rental properties that are located in vacation rental-friendly towns!

How to invest in vacation rentals, step-by-step

Buying a vacation rental property can be one of the best long-term investments you could ever make.

But before you get started on your journey, you should make sure you’re prepared for the challenges ahead, from picking the most convenient financing option to marketing your stay right.

Here’s all you need to know to make your first vacation rental investment a resounding success!

Pick your location

Research is the name of the game when it comes to making the most out of any investment, and short-term rentals are definitely no exception.

The first thing you should do is research the best places to buy vacation rental property in your state or even across the country, so you can analyze the pros and cons of the most attractive destinations with the help of a real estate professional.

Location is everything when it comes to vacation rental investments, especially since there are many towns antagonizing short-term rental investors and Airbnb hosts.

The perfect setting for your needs will likely be somewhere popular enough to attract vacation rental demand but not so popular to be already oversaturated with competitors.

Ideally, you’ll want to find up-and-coming tourist hotspots that are both affordable and able to attract visitors all year round, as well as working professionals and families if you ever decide to convert the property into a long-term rental.

Conduct an extensive market analysis

Once you have picked a location that meets your criteria, you’ll want to dive deeper into research by conducting an in-depth market analysis.

This is where you evaluate the viability of your chosen location in terms of tourist appeal.

Don’t only check the latest stats to see just how many people have been visiting or are expected to visit in the next year, but also make sure that the property you’re eyeing ticks all the boxes for a great stay.

This includes being close to public transport options and popular local attractions, as well as grocery stores, restaurants, parks, and bars.

You’ll also want to research what is the best time to buy property in the area, as you might want to wait until prices drop or, alternatively, until demand for high-quality accommodation rises before you make an offer.

The best way to access the stats you need is to consult websites like AirDNA, which are designed to compare all vacation rental properties in the area and give you a practical estimate of average occupancy rates, daily rates, and yearly rental income.

Knowing how your competitors are running their business will help you price your rental property right!

Crunch the numbers

Once you have researched the local economy and analyzed your competitors as much as you can, you can make a more educated decision on what property to go for.

Chances are, you have already weeded out the riskier investments from the best properties, so all you need to do before seeking out a good avenue for financing is to crunch the numbers and pick the most profitable, yet affordable property!

With all the information you’ve gathered, you should already be able to get a good estimate of how profitable the investment is going to be, including worst-case scenarios.

Beyond utility costs and taxes, you’ll want to get a detailed brief of all expenses you’re expected to shoulder, including major repairs and closing costs, so you can ramp up negotiations if necessary.

if you’re not too sure about the property’s potential, your best bet will be to get in touch with an experienced local realtor to understand how the local market works, beyond what you can gather from research alone!

Finance your investment property

When it comes to financing, the best option for first-time investors is to borrow from a mortgage company that specializes in vacation properties and long-term rental property.

You’ll be guaranteed low rates and low risk, and your investment will be seen as an asset rather than something that disqualifies you from borrowing.

A Home Equity Loan or a Home Equity Line Of Credit are also good options for established investors, as they guarantee low to zero closing costs, low interest rates, and even fixed interest in the case of Home Equity Loans.

Your primary home will however be used as collateral, and you’ll only be able to qualify if you have significant equity.

Whatever option you choose, make sure you conduct an accurate appraisal of the property before committing!

Cleaning and repairs

When buying a vacation rental property, you’ll be expected to pay more in property management fees and cleaning than you would with other real estate investments.

Make sure you negotiate with your seller to reduce the costs of repairs, so when it comes time to remodel and refurbish the property for your guests, you can benefit from a larger budget.

As turnovers are more frequent with vacation property, you’ll also want to hire a cleaning company to take care of all the cleaning in between guest stays, especially if you’re going to be running your business remotely.

If you’re able to spend more on cleaning and management issues, hiring a vacation rental management company is the recommended route, as it will allow you to focus on the bigger picture while an experienced team deals with bookings, rent collections, and occasional repairs.

Advertise

Finally, your last step will be to advertise the rental on popular platforms like Airbnb, Booking.com, and Vrbo, as well as on your website and any social media platform you choose.

Marketing your stay properly requires some thought too: You’ll want to take professional pictures and videos, focus on a specific target demographic, and appeal to this demographic by using the right descriptions in your listing.

This is also a task you can outsource if marketing is not your forte, so you can spend more time researching the market for more accurate listing prices and, who knows, even a second vacation rental investment!

Buying a vacation rental has never been easier

With over 15 years of experience driving our loan team, The Mortgage Shop is your one-stop destination for securing favorable loans on vacation homes, short-term rentals, and long-term rentals.

We’re much more than your average lender, we’re a team who’s dedicated to seeing you succeed and building wealth for generations to come.

Your entrepreneurial spirit is an asset, not a hassle, and that’s why we are dedicated to providing exceptional service tailored to your goals.

If you’ve been looking for a mortgage loan company that understands the world of real estate investing and short-term rental investing, you’ve finally found your financing — you’re only a click away from making your dreams a reality!